Energy names should continue to do well in 2023, despite the 60% gains they posted in 2022. That’s what energy company insiders are telling us, explains Michael Brush, editor of Brush Up on Stocks.
Over the past few months, I’ve seen attractive insider buying at a dozen or more energy stocks. I use the insider signal as a starting point to find promising names for my newsletter, and it works especially well in energy.
A good example is Texas Pacific Land (TPL). As of December 2022, this one was up 360% since I suggested it in my stock letter in August, 2020. But it still looks like a buy. Not only does a smart insider continue to accumulate, but underlying energy sector fundamentals support the business.
Brent oil will trade up to $100 per barrel on average next year and spike up over 25% to $110, says Francisco Blanch, the Bank of America head of global commodities and derivatives research. Here are five factors that will support oil prices and energy stocks in 2023.
1. China will reopen, as zero Covid policies are eased. Reopening would boost China’s oil demand by 5%.
2. The Fed will pivot in early 2023, backing off on rate hikes. This will be bullish for the global economy, which will post 2.4% GDP growth in 2023, says Blanch.
3. Producers have scarce capacity because they have underinvested in development for years.
4. Inventories are low. OECD petroleum stocks were at 3.96 billion barrels at the end of 2022. That’s the lowest level for this time of year since at least 1986. “It is not going to take a lot to have oil prices go up,” says Blanch.
5. The U.S. won’t come to the rescue. In the past, U.S. shale companies have been the swing producers when oil prices spiked. Not anymore. They are sticking to their financial discipline and returning cash to shareholders. The rising costs equipment and labor also present challenges.
Meanwhile, smart insiders particularly like Texas Pacific Land, which has a market cap of $20 billion. Texas Pacific owns a lot land in the Permian Basin in western Texas. The Permian is an incredibly rich energy basin. The company owns all this land because it was originally a land trust in 1888 set up to take over large land holdings from the Texas and Pacific Railway Company.
This stock has been quite strong, but it still has a long way to go for three reasons, says James Davolos of the Kinetics Market Opportunities (KMKNX) and Kinetics Paradigm (WWNPX) funds. Both funds have huge positions in this name, but they continue to buy.
First, its energy assets are 100% leased, but so far only 7% has been developed. Second, investors are undervaluing the company’s revenue from royalties on development rights leased to companies like Occidental Petroleum (OXY), ConocoPhillips (COP) and Chevron (CVX), according to Davolos.
Third, Texas Land Pacific has other potential revenue streams that are underappreciated. Water on the land will be sold for use in fracking. The land can also be used for cell towers, access roads, and solar and wind farms.
Davolos' Kinetics funds are smart insiders in my book because they started buying this name in the $10 to $40 range during 2002-2012. It was recently a $2,600 stock and the funds were still adding to their huge positions.
Continued buying on strength, as opposed to selling into strength, is one of the key factors contributing to a strong insider buy signal, according to how I analyze insider buys to find the best purchases to consider.